this newsletter in PDF
In this issue:
1. News & Upcoming Events
2. Boating Accident Litigation Issues Highlighted
3. UK Update on Limitation of Liability
4. Forum Selection Clauses
5. Customs Update
6. Failure to Equip Vessel Properly
7. Hague Rules Do Not Apply to Charterparty
8. Priority Rules on Sale of Vessel
9. Loss Transfer Arbitrations
1. News & Upcoming Events
Fernandes Hearn LLP 17th Annual Maritime and Transportation Conference
Date: Thursday January 19th, 2017
Location: The Advocates’ Society Education Centre
250 Yonge Street, Suite 2700 Toronto
Cost: $65.00 - Includes light lunch and materials on USB Drive
Registration: Sharifa Green, Fernandes Hearn LLP 416-203-9500 or Sharifa@fernandeshearn.com
Send cheques to: Fernandes Hearn LLP,
155 University Ave. Suite 700, ON M5H 3B7
Limited to 110 attendees 5.5 RIBO Credits (Technical Category)
Topics and Speakers:
Registration & Coffee
Sponsor: RIO Insurance Brokers
Post Incident Steps and Aftermath
- Emergency Response Plans
- Dealing with Authorities
- Dealing with the Media
- Post Incident Blues
Contracts Update: This session will provide an update on case law interpreting contracts; Also a review of Priority Payments and Trust Obligations in the trucking and logistics field
Safety Plans, Due Diligence, and Infractions in Trucking
Panel: Alan Cofman, Louis Amato-Gauci,
10:00 – 10:30
Emerging Employment Law Issues in the Transportation Industry
- Federal v. Provincial Issues
- Non Competition / Non Solicitation Clauses
- Human Rights and Disabilities
Panel: Rui Fernandes, Carole McAfee Wallace
10:30 – 11:00
U.S. – Malizzi on OPA
U.K. – A. Birch – Fixed Premium Market
Breakout 1 – Defending Cargo Claims
Emerging Customs Issues
Insurance Coverage Issues in Transportation
Food Safety and Transportation:
• new US Rule on Sanitary Transportation of Food and Animal Food. Canadian regulatory equivalents
• the anatomy of a temperature-controlled produce claim
12:15 to 1:00
Lunch Sponsor: Fernandes Hearn LLP
1:00 to 3:30
Mock Trial – A shipment of grapes from Valparaiso Chile in a container to Seattle, then by truck to Vancouver, then by CN to Concord Ontario and thereafter by truck to the Ontario Food Terminal. On arrival the grapes were discovered damaged. The trial will explore documentation and transportation issues involving a load broker, ocean carrier, trucking company, and rail company.
Lawyers: Fernandes, Stoll, Manson, Cofman will present the case to Justice C.W. Wallace
Publisher LexisNexis has released the Halsbury’s Laws of Canada 2016 edition of Maritime Law written by Rui Fernandes.
Gordon Hearn will be representing the Firm at the January 8 - 9, 2017 meeting of the Conference of Freight Counsel in Dana Point, California
Gordon Hearn will be providing a Canadian perspective in an international panel discussion on “Conflicts of Law Issues in the Cross Border Carriage of Goods between Canada, the United States and Mexico” at the Chicago Regional Seminar of the Transportation Lawyers Association on January 20, 2017.
Kim Stoll will be representing the Firm at the January 30-31, 2017 American Institute 6th Annual Forum on Admiralty & Maritime Claims and Litigation in Miami, Florida.
The Marine Club Annual Dinner will take place on January 20th, 2017 in Toronto at the Royal York Hotel.
2. Boating Accident Litigation Issues Highlighted
The recent decision of Banford v. Mitchelson 2016 SKQB 328 illustrates how important it is for parties to have competent counsel as soon as possible after an accident, how witness testimony is important to a case, and the effects on a civil case of pleading guilty to a criminal charge.
Connie Banford (“Connie”), was injured in a boating accident. Robert Mitchelson (“Mitchelson”), denied that he was the operator of the boat that caused the injuries to Ms. Banford.
The Banfords owned a cottage on Saskatchewan Beach along Long Lake, in Saskatchewan. On Canada Day each year a fireworks display is put on at the village of Regina Beach. People watch the display from the water in their boats. It is not unusual to have some 200 boats in the water during the display.
On July 1, 2005 the Banford family went to watch the fireworks. They left their cottage in their 18.5 foot Bayliner inboard boat. The Banford boat travelled to the Regina Beach Yacht club area and sat in a convoy of boats to watch the fireworks. Once the fireworks were over, the Banfords proceeded to the north side of the lake and trolled their way eastward to return to their cottage. The local cottage owners were putting on their own fireworks displays and the occupants of the Banford boat were going slow to take in these individual displays.
When they were approximately one-half of the way home, another boat came up behind them, overtaking them. The other boat came up over the top of the Banford boat from right to left. In the process, Connie testified that the hull of the other boat collided with her and caused her to fall into the walkway of the Banford boat. As the boat came over the back of the Banford boat, a passenger on the Banford testified he was able to identify the name of the other boat on the side as a “Baja” boat with a white stripe.
As a result of the collision, Connie suffered injuries. The other boat then left the scene. It was chased. The Banford boat caught up with the Baja vessel. Words were exchanged and the Baja vessel took off again.
The following day, Banford boat operator Rhory Banford (“Rhory”) contacted the RCMP to report the incident. He had surmised the offending boat was from the cottage area immediately to the east of Saskatchewan Beach. He arrived at this supposition because the Banford cottage was at the very end of Saskatchewan Beach and the other boat was headed east. The Kannata Valley cottage area is immediately to the east of Saskatchewan Beach.
In furtherance of this conclusion, Rhory and Connie proceeded to contact friends who had property in Kannata Valley to ask if they knew of anyone who owned a Baja boat in that area. They were told about Mitchelson, as he owned such a boat. A few days after the accident, Rhory drove his boat to the Kannata Valley area where he saw a Baja boat in a boatlift on the water. He indicated it had the same type of stripe on the side. He also indicated there was a mark on the hull of the boat that seemed consistent with the damage that would have been caused by the collision.
Rhory testified this was the same man he had seen on the night of the accident. Rhory immediately went to the RCMP detachment in Lumsden to report what he had discovered. The man was Mitchelson.
The RCMP charged Mitchelson with a violation of the Canada Shipping Act, 2001, SC 2001, c 26 and provided him with an appearance notice with a court date of August 22, 2005.
Mitchelson testified that on the evening of July 1, 2005, he and his wife had travelled by boat from their cottage in Kannata Valley to watch the fireworks at Regina Beach. Following the fireworks display, he was proceeding back to their cottage. He was travelling at a slow speed. He was operating a Baja boat. While he was travelling, a boat came up to his boat and the occupants were yelling and swearing at he and his wife. He could not make out what they were saying. He thought the occupants might have been intoxicated. He left the area and proceeded home.
During the trial the court also heard that Mitchelson had appeared in Provincial Court and entered a guilty plea to the CSA violation, dangerous operation of a boat. The prosecutor had read into the record the following:
With respect to the facts, Your Honour, this occurred on July first at Regina Beach after the fireworks on Last Mountain Lake. An individual by the name of Banford was operating a boatload of people and was involved in a hit and run. He indicated to the police that a 21-foot Baja boat with a male as the driver and a female companion struck his boat, basically a glancing blow to his boat. His wife was in the boat. She fell down, received some minor injuries with respect to it. Your Honour, it is a charge of dangerous operation of a boat obviously. We’re suggesting a fine of $250. We discussed that with Mr. Michelson and he’s indicated that he’s in agreement with that, ...
Mitchelson was served with the statement of claim the civil action. He responded with a letter to the then lawyer for the plaintiffs and indicated he had not been in a collision. He took no further steps and the action was noted for default. Some years later, in 2012, the plaintiffs applied for judgment and MItchelson applied to dismiss the action, or, in the alternative, to set aside the noting for default. The court set aside the noting for default and allowed MItchelson to file a statement of defence.
Some of the issues during the trial were as follows:
1. What is the standard of proof in this civil proceeding?
2. What is the effect of the failure to call certain witnesses?
3. What is the effect of the defendant’s finding of guilt on the charge pursuant the Canada Shipping Act?
4. Has the plaintiff satisfied the standard of proof to establish the defendant was the operator of the boat?
1. What is the standard of proof in this civil proceeding?
The court concluded that the plaintiff must place before the court clear and cogent evidence to show the allegation is more likely than not to have occurred; that is, on a balance of probabilities.
2. What is the effect of the failure to call certain witnesses?
Mitchelson denied he was the operator of the boat involved in the collision. He did not call his wife as a witness.
The court may draw an adverse inference from a party’s failure to call a witness in a civil proceeding. A party is expected to call that evidence which will assist the court in determining the question in issue.
Mitchelson denied an event occurred, in the face of the fact of an accident, by a Baja boat, and with two people positively identifying Mitchelson as the operator of the offending boat. Those witnesses identified Mitchelson and a woman as being the occupants of the offending boat. They indicated that the woman had dark hair.
At trial Mitchelson confirmed his wife was on the boat the evening of July 1, 2005. The court noted:
She would have been able to then testify as to all of the events of the night including the absence of an accident. On a perhaps smaller point, the defendant testified his wife has always had blond hair and denied her hair was dark on July 1, 2005. She could have testified to both confirm his point and thereby call into question the Banford’s powers of observation.
There was no explanation provided for why Mitchelson’s wife was not called as a witness. It was established that at the time of trial, Mitchelson remained married to his wife and she was present at their home located immediately outside of Regina. There was nothing to suggest she was suffering from any disability that would have prevented her from testifying.
The court held:
I am compelled to draw an adverse inference from the defendant’s failure to call his wife to testify. I conclude there is evidence of Mrs. Mitchelson, concerning the boating accident, which would be unfavourable to the defendant. It is for this reason she was not called to testify.
3. What is the effect of the defendant finding of guilt on the charge pursuant the Canada Shipping Act?
A prior conviction is to be considered as prima facie proof that the facts, which form part of the conviction, did occur. The opposite party is then provided with an opportunity to rebut those facts in the subsequent civil proceeding.
In this case the judge held that in the circumstances it was appropriate to allow Mr. Mitchelson to dispute responsibility for the accident. It was not an abuse of process to permit that to occur. There was no evidence called at the criminal proceeding and accordingly, the finding of guilt was not as a result of the court reviewing any sworn testimony. The judge held that Mitchelson’s explanation for why he entered the guilty plea was an explanation that has been specifically recognized by the Supreme Court of Canada.
In this case, Mitchelson testified he entered a guilty plea due to his economic circumstances. Essentially, he said it was cheaper to plead guilty, get a minimal fine and not have to take additional time off work to deal with the matter. There was no evidence tendered in the Provincial Court proceeding.
4. Has the plaintiff satisfied the standard of proof to establish the defendant was the operator of the boat?
The court noted:
“Rhory and Shelly Banford positively identified Mr. Mitchelson as the operator of the offending boat. On July 1, 2005, Mr. Mitchelson was in his Baja boat on Long Lake. The Banfords, together with Blaine Huber, testified the Baja boat came to a stop following the collision. It was a number of feet from the Banford boat. It remained stopped for a minute or two and then left. Shelley and Rhory testified they were able to see and positively identify the operator.”
Both of these individuals were cross-examined on previous affidavits they had filed in this proceeding which were inconsistent with their current testimony. On the previous occasion, Rhory swore the other boat immediately left the scene following the collision. He explained that this statement was not accurate and the boat did stop for a minute or two.
The court also noted that civil courts can take some direction for the factors routinely considered by criminal courts in assessing the evidence of a witness who is seeking to identify another party. Criminal courts regularly consider the following types of factors in determining the weight to be given to eyewitness identification of a party:
a. Opportunity to observe;
b. Light conditions;
c. Distance from witness to suspect;
d. Eyesight of the witness;
e. Previous acquaintance with the suspect;
f. Focus or attention or distraction;
g. Presence or absence of distinctive features of the suspect.
The court reviewed the evidence on the identification:
Both Rhory and Shelley had an opportunity to observe the defendant on two occasions and Rhory saw him on a third occasion outside the cottage. Conditions for the first two observations were less than ideal: it was nighttime and there was limited illumination by lighting. However, there was some illumination by the rear mast lighting on the defendant’s boat. On the first occasion, the boats may have been 20 to 40 feet apart. In either case, this is not a great distance and it would be possible to make an identification. On the second occasion, the boats were directly side by side and it would have been even more possible to make an identification. While time was limited on each occasion, it may have been as much as two minutes, but appears to have been around the minute mark. I do not view this as an insignificant amount of time.
Coupled with this, the defendant was operating a Baja boat. He was in the vicinity that evening. His actions in “just leaving” following the confrontation with the Banford boat appear odd in the circumstances.
Interestingly, the court noted that the plea of guilt, while not forestalling Mitchelson disputing liability in the civil proceedings, was additional evidence confirming his involvement. The judge found that Mitchelson held a master’s degree in industrial psychology. Over the years Mitchelson had successfully operated his own consulting business and he had managed a medical surgical business operation. He presented as an intelligent and sophisticated individual. His failure to dispute the words of the Crown at the sentencing hearing “are unexplainable. He testified he did not hear those words. Yet, he was present and he was specifically asked if he had anything he wanted to say prior to sentence being pronounced. He declined to say anything in response.”
The court held that:
The failure to call Mrs. Mitchelson suggests her evidence would not have been favourable to Mr. Mitchelson’s case. His denial of involvement in the face of positive identifications, and a guilty plea based on the fact of an accident, calls out for evidence establishing his lack of involvement. Mrs. Mitchelson was this evidence.
In all of the circumstances, the court was satisfied, on a balance of probabilities, that it was more likely than not that Mitchelson was the operator of the Baja boat that collided with the Banford boat.
Damages were awarded to Connie Banford for her injuries.
Rui M. Fernandes
Follow Rui M. Fernandes on Twitter @RuiMFernandes and on Linkedin. See also his blog at http://transportlaw.blogspot.ca
3. Two UK Decisions on Limitation of Liability
There are two recent decisions on the limitation of liability of a shipowner under the Convention on Limitation of Liability for Maritime Claims 1986that will be equally applicable in Canada.
In Borko v. Cape Bari  UKPC 20 the Privy Council considered an appeal from the Court of Appeal of the Commonwealth of the Bahamas. The case involved a collision of the vessel Cape Bari with a sea berth during berthing operations. The collision resulted in damages to the berth of U.S. $22 million. The vessel owners claimed they were entitled to limit liability to 11,012,433 Special Drawing Rights (calculated by reference to the vessel’s gross tonnage), being approximately US$16.9 million. The berth owners denied that the owners were entitled to limit liability on the ground they had waived their right to do so under a contract that the parties had made immediately before the berthing operation. The contract was contained in or evidenced by a document referred to hereafter as “Conditions of Use”, which was signed by the master.
The trial judge had held that the owners were not entitled to limit their liability because they had contracted out of their right to limit. The Court of Appeal reversed the decision of the judge on the grounds that, under the 1976 Convention, it was not permissible to contract out of the right to limit, even by entering into a contract of indemnity.
The Privy Council had to consider (1) whether under 1976 Convention it was permissible for the owners to contract out of the right to limit (as both parties had acknowledged at trial) and (2) on the true construction of the Conditions of Use, whether the owners had done so (as found by the trial judge).
The Condition of Use in question stated:
If in connection with, or by reason of, the use or intended use by any vessel of the terminal facilities or any part thereof, any damage is caused to the terminal facilities or any part thereof from whatsoever cause such damage may arise, and irrespective of weather [sic] or not such damage has been caused or contributed to by the negligence of BORCO or its servants, and irrespective of whether there has been any neglect or default on the part of the vessel or the Owner, in any such event the vessel and the Owner shall hold BORCO harmless from and indemnified against all and any loss, damages, costs and expenses incurred by BORCO in connection therewith. Further, the vessel and her Owner shall hold BORCO harmless and indemnified against all and any claims, damages, cost and expenses arising out of any loss, damage or delay caused to any third party arising directly or indirectly from the use of the terminal facilities or of any part thereof by the vessel ... [Emphasis added]
After considering English and Hong Kong law authorities, the Privy Council set out some general principles in relation to waiving the right to limit:
a) it is possible for a ship owner to contract out of or waive the right to limit liability under the 1976 Convention (or its predecessor Convention) - nothing in the words of the Convention prevents this;
b) for a party to abandon or contract out of valuable legal rights, the provisions relied upon must make it clear that this is what is intended. The more valuable the right, the clearer the language needs to be;
c) when construing whether a contract seeks to waive a right, the starting point is that the right in question is treated as being known and understood by the parties to apply;
d) the right is then considered written into the contract unless there is a provision in the contract which clearly and unequivocally excludes it such that the two cannot be read together and the right must therefore be excluded;
e) it may be possible to exclude the right without express reference to the statute or convention, but the right must be clearly excluded, expressly or by necessary implication, such that a reasonable observer would agree that the owner agreed to waive it.
The Privy Council set aside the Court of Appeal decision, holding that the right of limitation could be contracted out of. It held, however, that on a true construction of the "Conditions of Use", the ship owners had not actually agreed to exclude their right to limit, as that right could exist alongside the contractual wording, with BORCO entitled to an indemnity "up to the maximum recoverable pursuant to the Convention".
The second decision out of the United Kingdom courts was the Atlantik Confidence case. In Kairos Shipping Ltd. v. Enka & Co. LLC  EWHC 2412 the vessel Atlantic Confidence sank and was lost after a fire in the engine room. The vessel was laden with cargo. The captain and the crew abandoned her in two lifeboats. The vessel owners contended that the loss was the result of flooding following a fire. The cargo claimant’s position was that the vessel had been scuttled owing to the owners’ financial circumstances.
The court considered the evidence and concluded that the sinking was a deliberate scuttling performed by the chief engineer with the knowledge of the master on the instructions of the owners.
A shipowner is entitled to limit his liability unless it is proven that the loss resulted from his personal act or omission, committed with the intent to cause such loss, or recklessly and with knowledge that such loss would probably result; see Article 4 of the Limitation Convention. The burden of proving such conduct lays upon the person challenging the right to limit, in this case, the cargo owners.
That burden was described by Sheen J. in The Bowbelle  1 WLR 1330 as a "very heavy burden", which description has been approved by the Court of Appeal in The Leerort  2 Lloyd’s Rep 291 and by the Privy Council in The Cape Bari  UKPC 20. The burden is "very heavy" because of the nature of the conduct which must be proved to break the right to limit. The burden was described by Lord Clarke in The Cape Bari at paragraph 14 as "a high hurdle to jump". In Canada, the same descriptions have been made in the Peracomo case and the Siemens decisions (*1).
The court noted the difficulty that challengers to limitation face in terms of the evidence:
ATLANTIK CONFIDENCE sank in deep water. The wreck has not been inspected with a view to determining the cause of the fire or the cause of the sinking. The available evidence as to mechanism is therefore limited and consists of surveys of the vessel prior to the final voyage, the observations of the fire by the chief engineer and second engineer and photographs of the vessel taken after the vessel had been abandoned and before she sank. In such circumstances it is inevitable that Cargo will be unable to give a full and complete account of the alleged scuttling (and unsurprising if the account changes as the litigation proceeds). That need not be fatal to Cargo’s case so long as, after examining all of the evidence, the court is able to infer that the vessel was scuttled on the instructions of Mr. Agaoglu. In deciding whether the court is able to draw such inference the court must keep well in mind that it is possible, especially where the evidence is limited, that the case may be one where Cargo is unable to establish its case with the result that the cause of the loss remains in doubt and the court is unable to make a finding as to the cause of the loss; see The Popi M  2 Ll. L. Rep. 1 at pp.3-6.
The court heard oral testimony from the vessel owner Mr. Agaoglu, from Captain Toran, the chief executive officer or fleet manager of the owners, and Captains Taner and Mahmut, two deck superintendents. They and other fact witnesses were called by the owners. The court also heard a considerable amount of expert testimony.
The court concluded after hearing all of the evidence:
ATLANTIK CONFIDENCE was lost at sea after suffering a fire in the store room on the second deck of the engine room. It is more likely than not that the origin of the fire was in the store room and there is a real and substantial possibility that that fire was started deliberately in the doorway of the store room by spilling oil and igniting it. There is no more than a remote possibility that it was caused accidentally by reason of a fire originating from a leak of fuel oil at the no.2 generator. The engine room flooded. That flooding could have been caused deliberately and there is no more than a remote or unlikely possibility that it was caused by a crack in the shell plating resulting from thermal stresses caused by the fire. At about the same time the ballast double bottom tanks nos. 4 and 5 on the portside were flooded. That flooding could have been caused deliberately and there is no more than a remote possibility that it could have been caused by a flashover from the fire affecting the cabling to the ballast valve solenoid cabinet forward of the store room. Whilst the improbable can happen it is difficult to accept that three improbable events (an accidental fire, an accidental flooding of the engine room caused by the fire and an accidental flooding of two double bottom tanks on the portside caused by the fire) may have occurred in rapid succession to each other. This reasoning is frequently used in alleged scuttling cases.
In addition to there being three improbable events the judge noted that those three improbable events were also preceded by a change of route into deep water, an indication of the intent to scuttle the vessel so it could not be found or raised. The Owners of the vessel had instructed the master to change the route of the vessel so that she sailed into deep water. The master and Captain Toran sought to hide that change of route. After it could no longer be hidden, they said it was justified by a risk of piracy when it was not. The court elaborated further on the reasons for finding a deliberate scuttling.
The court therefore held that the loss resulted from the personal act of owners, which was committed with the intent to cause the loss incurred, and therefore refused the owners' application for limitation decree.
Rui M. Fernandes
Follow Rui M. Fernandes on Twitter @RuiMFernandes and on Linkedin. See also his blog at http://transportlaw.blogspot.ca
(*1) Peracomo Inc v TELUS Communications Co 2014 SCC 29; Siemens Canada Limited v. J.D. Irving, Limited, 2011 FC 791; 2012 FCA 225; Siemens Canada Limited v. J.D. Irving, Limited, 2016 FC 69 2016 FC 287
4. Down the Rabbit Hole with Forum Selection Clauses
The recent decision of the Ontario Court of Appeal in Novatrax International Inc. v. Hägele Landtechnik GmbH (*1) provides an interesting illustration of issues that can arise with a forum selection clause in an international commercial contract.
The ‘take-away’ from this case, and why it is important reading, can be summarized as follows:
1. What will a court do when faced with the situation where two parties enter into a contract agreeing on ‘forum selection’ in the event of a dispute, with one party later suing the other in a different forum, which draws the protest of the other contracting party?
2. Assume that the court is inclined to enforce the jurisdiction clause in such a case – requiring the plaintiff to revert to the ‘contracted forum’ for the dispute. What of the fact that the plaintiff sued third parties in the original law suit who were not ‘privy’ to the contract. What happens to those claims? Is the plaintiff then required to advance those claims in the ‘contracted forum’ as well, or should they proceed in the ‘disputed jurisdiction’ where the claim was first filed by the plaintiff?
3. If the action between the contracting parties is required to be moved to the ‘contracted forum’, and the claims against the non-contracting defendants are allowed to remain in the ‘disputed forum’, should the actions be allowed to proceed simultaneously or should the latter be stayed pending an adjudication of the former?
In July 2006 Novatrax International Inc. (Novatrax) renewed an Exclusive Sales Agreement (the “ESA”) with the respondent, Hägele Landtechnik GmbH (“Hägele”) under which it would continue to distribute industrial reversible fans in Canada and the United States. Pursuant to the terms of the contract either party could terminate the ESA on 12 months’ notice, or without notice in specified circumstances.
On November 24, 2009, Hägele notified Novatrax that it was terminating the ESA immediately for cause. In January 2010, Novatrax commenced an action for damages alleging wrongful termination of the ESA and willful misconduct giving rise to liability in tort against Hägele, and its principal officers Karl Hägele and Benjamin Hägele. Novatrax also added Cleanfix North America Ltd. (“Cleanfix”) to the action. Cleanfix was a related company set up by Hägele to sell its products directly into the Canadian and American markets.
Section 18 of the ESA contained a forum selection clause providing as follows:
The contractual parties agree that German law is binding and to settle any disputes by a binding arbitration through the “Industrie und Handelskammer” (Chamber of Commerce) in Frankfurt.
The defendants moved to “stay” the action, relying on the forum selection clause. They wanted to the dispute referred to Germany pursuant to the above clause. The motion judge who heard this motion granted the stay. Wishing to continue with its claims in Ontario, Novatrax appealed the decision to the Ontario Court of Appeal.
The Issues on the Appeal
The parties agreed that the motion judge correctly identified the governing principles that relate to the enforcement of a forum selection clause. These were set out by the Supreme Court of Canada in Z.I. Pompey Industrie v. ECU-Line N.V., (“Pompey”) (*2) and by the Ontario Court of Appeal in Expedition Helicopters Inc. v. Honeywell Inc., ("Expedition Helicopters”) (*3), and in 2249659 Ontario Ltd. v. Sparkasse Siegen (*4):
(i) The law favours the enforcement of forum selection clauses in commercial contracts. Where the parties have agreed to a forum selection clause, the starting point in the analysis is that the parties should be held to their bargain;
(ii) A stay of an action should be granted unless the plaintiff shows “strong cause” that the case is exceptional and the forum selection clause should not be enforced;
(iii) The requirement that the plaintiff show “strong cause” presumes that there is an agreement containing a clear forum selection clause and that clause, by its terms, applies to the claims the plaintiff seeks to bring in Ontario; and
(iv) The forum selection clause pervades a forum non conveniens analysis and must be given full weight in the consideration of other factors. (*5)
Novatrax raised two issues on the appeal.
It submitted that the motion judge erred in finding that the language of the forum selection clause (i.e. “to settle any disputes by a binding arbitration”) was broad enough to capture both the contract and tort claims pleaded by Novatrax against Hägele. It also submitted that the matter should not have been stayed as against the Karl Hägele, Benjamin Hägele, and Cleanfix defendants because they were not parties to the ESA containing the forum selection clause.
Issue #1: Did the motion judge err in interpreting the scope of the forum selection clause?
In its Statement of Claim, Novatrax asserted several contract claims against Hägele:
(i) wrongful termination of the ESA;
(ii) a breach of the duty of good faith by accessing confidential Novatrax information when Benjamin Hägele was permitted to set up an office within the Novatrax’s facility; and
(iii) a breach of the duty of good faith in communicating the termination of the ESA to Novatrax’s employees and its financial lender.
Novatrax argued that the motion judge erred by failing to find that it had shown strong cause not to enforce the forum selection clause. Novatrax pointed to the decision in Expedition Helicopters where the Ontario Court of Appeal stated that a factor, which may justify departure from the general principle of enforcing a forum selection clause, is where “the claim or the circumstances that have arisen are outside of what was reasonably contemplated by the parties when they agreed to the clause.”Novatrax contended that the high-handed and wrongful manner in which Hägele terminated the ESA was not contemplated at the time it entered into the contract, such that the forum selection clause should not be enforced in the circumstances.
The Court of Appeal rejected this submission on three grounds.
First, the scope of a forum selection clause is not determined by the professed subjective intention of one of the contracting parties at the time the contract was formed. Whether the nature of a claim lies outside of what was reasonably contemplated at the time the contract was signed turns on the interpretation of the forum selection clause in accordance with general contract law principles and how there is a connection between the nature of the claims pleaded and those covered by the clause. In this regard a basic contract law principle calls for the court to construct or interpret a contact on the basis of the objective manifestation of the contracting parties in the words they used in the contract and possibly in their mutual dealings leading up to the contract formation.
Secondly, the forum selection clause required the parties to “settle any disputes by a binding arbitration…in Frankfurt.” The Court noted that contractual disputes could arise in respect of any stage in the life of a contract: in its formation, performance, termination or expiration. Novatrax’s contractual claims against Hägele concerned the performance and termination of the ESA. The language of s. 18 of the ESA is broad enough to include, within the term “any disputes”, claims relating to any stage of the ESA's life-cycle, including the wrongful termination and breach of duty of good faith claims pleaded by Novatrax.
Thirdly, the motion judge correctly held that the severity of the alleged breach of contract does not play a role in the strong cause analysis. As the Supreme Court of Canada stated in Pompey, at para. 31:
[A] court, in the context of an application for a stay to uphold a forum selection clause … must not delve into whether one party has deviated from, or fundamentally breached an otherwise validly formed contract. Such inquiries would render forum selection clauses illusory since most disputes will involve allegations which, if proved, will make the agreement terminable or voidable by the aggrieved party.
In this case, Novatrax’s claims of wrongful termination and breach of the duty of good faith all concerned the performance and termination of the contract between the parties. The Court found that those claims all clearly fell within the scope of s. 18 of the ESA.
The motion judge found that the forum selection clause was operative “not only [as to the] breaches of contract stemming from the agreement in which such clauses are found, but also [as to the] related tortious causes of action arising out of the same circumstances.” Novatrax asserted that the motion judge erred in staying its tort claims raised against Hägele. In this regard the Court of Appeal found no error in the motion judge’s conclusion. It is well-established that a broad forum selection clause covering “any disputes” applies not only to contract claims, but also tort claims, such as misrepresentation, interference with economic relations and civil conspiracy that arise from the contractual relationship: Crown Resources Corporation S.A. v. National Iranian Oil Company (*6).
Issue #2: Did the motion judge err in staying the action against Karl Hägele and Benjamin Hägele and Cleanfix, who were not parties to the ESA?
The ruling by the Court of Appeal on this issue resulted in a “split”: one position was taken the “majority” (i.e. two out of the three judges) with the third “dissenting” judge disagreeing on the outcome of this issue. As in any other such case, the finding of the “majority” carried the day.
The majority ruling, determining the outcome of the issue
Novatrax pleaded in its claim that it involved the non-contracting defendants in its “future strategic business decisions” when Hägele asked it to allow Benjamin Hägele to set up an office within Novatrax’s facility. Novatrax alleged that Benjamin Hägele thereby gained access to its confidential and proprietary information. Hägele, the individual defendants, and Cleanfix are then alleged to have utilized that access to Novatrax’s information to terminate the ESA, notify employees and the bank about the termination, and enable Cleanfix “to springboard into the North American marketplace and allow these defendants to compete directly, but unfairly, with Novatrax in this specialized sales market.”
In an important finding, the motion judge had held that Karl Hägele and Benjamin Hägele were added to the action because of their relationship to Hägele, with Cleanfix being added because it was the corporation created by those individuals to further their common purpose. Citing Momentous.ca Corporation v. Canadian American Association of Professional Baseball Ltd. (“Momentous.ca”) (*7) the motion judge concluded:
[W]here the plaintiff itself takes a position in its claim … that the allegations against the parties not privy to the contract are so intertwined with the claims being asserted against a party that is a party to the contract that they should be heard and decided together, and where the allegations clearly all relate to and arise out of the dealings between the parties to the contract, that the choice of forum clause agreed to by the plaintiff should govern…
Novotrax submitted that the conduct of Karl Hägele, Benjamin Hägele and Cleanfix were not within its reasonable contemplation when the ESA was made and that the judge erred in concluding that the language of the forum selection clause was broad enough to encompass the claims pleaded against them.
The majority did not accept this submission, noting the principle cited above that a forum selection clause pervades a forum non conveniens analysis and must be given full weight in the consideration of other factors. Even though Cleanfix and the individual respondents were not parties to the ESA, the claims pleaded against them all arose out of the same transactions and occurrences and raise common questions of fact and law linked to the claims pleaded against Hägele. The factually-intertwined nature of the claims pleaded by Novatrax against all respondents required that the forum selection clause drive the stay analysis.
It should be noted that the dissenting judge disagreed with this result, noting that it would be tantamount to adopting the proposition that a party who has not agreed to arbitration with another can be forced to arbitrate its claims against that party.
The majority registered caution in stating that as a general rule a court lacks the jurisdiction to compel those who are not parties to an arbitration agreement to submit their claims to arbitration. However, whether the issues for arbitration are substantially the same as those in the action, requires consideration of how the plaintiff has pleaded its claim. The majority noted that the claims pleaded by Novatrax against all the defendants were factually-intertwined and turned on the determination of the threshold issue of whether Hägele wrongfully terminated the ESA. The majority also noted that “it is very doubtful that the claims pleaded against the two individual defendants – both officers and directors of Hägele – are sustainable as claims distinct from those against Hägele because they do not exhibit a separate identity or intent from that of the company so as to make the act or conduct complained of that of the individuals.”
Accordingly, the practical effect of the motion judge’s exercise of his discretion in the present case was to require the issue of whether Hägele had wrongfully terminated the ESA to be decided first in an arbitration. That exercise of discretion is entitled to considerable deference on appeal absent an error in principle, misapprehension of the evidence, or unreasonable decision: Lapointe Rosentein Marchand Melançon v. Cassels Brock (*8).
Accordingly, the majority held that the motion judge did not commit any error nor did he reach an unreasonable result by including the claims against Cleanfix and the individual defendants within the ambit of the stay. The majority dismissed the appeal and Novatrax would now have to pursue all of its claims in arbitration in Germany in accordance with the forum selection clause.
The dissenting judge’s views at the Court of Appeal
While the majority opinion reviewed above carried the day, it is always instructive to consider the views of a dissenting judge so as to gain a full appreciation of matters.
This judge agreed that, on the first issue, the motion judge was entitled to find that the appellant failed to show strong cause why the choice of forum in the contract should not be enforced, and was therefore correct to stay the plaintiff’s claims against Hägele in Ontario. This judge however disagreed with the majority’s decision to uphold the motion judge’s order that the appellant’s claims against the non-contracting defendants should also be stayed and referred to arbitration in Germany.
This judge cited “trite law” that an arbitration agreement gives an arbitrator jurisdiction only over disputes between the parties to the agreement. Where it is clear on the face of the arbitration agreement that a party to the litigation is not a party to the agreement, that issue can and should be determined by the court on a stay application. Moreover, an arbitrator cannot make an arbitral award that disposes of the rights between a party and a non-party to the agreement. (*9)
The dissenting judge found that the Momentous.ca case noted above was factually different that the present case and did not provide the analytical avenue relied upon by the majority. In the Momentous.ca case, the plaintiffs specifically alleged that:
i) all the defendants were necessary parties to the same action,
ii) that they conspired together against the plaintiffs,
iii) that the claims raised common questions of fact and law,
iv) that they arose out of the same occurrences,
v) and that their joinder would promote the convenient administration of justice, the plaintiffs could not maintain that they should be allowed to proceed [with different actions] separately …
The court in that case accordingly had a basis to conclude, despite the fact that two defendants were not privy to the agreement containing the choice of forum and arbitration clauses, that “on the state of the pleadings”, the claims against all the defendants should be subject to the forum jurisdiction clause.
The dissenting judge in this case found that such an element of inferred ‘consent’ on the plaintiffs part was missing. Unlike the Momentous.ca case, there was no acknowledgement by the plaintiff on the face of its claim that, if and when the forum selection clause would be enforceable as concerns the ‘contracting defendant’, then it would be enforceable as against all defendants as an ‘all or nothing’ proposition.
By comparison, the statement of claim in the present case dealt separately with the claims against the corporate respondent Hägele for breach of contract and wrongful termination of the ESA. It then made claims against all of the other defendants for other (i.e. tortious) conduct. The dissenting judge noted that she would adopt this principled approach. Turning to the first factor, the issue to be determined in the arbitration was whether the corporate respondent Hägele wrongfully terminated the ESA with Novatrax. According to the statement of claim, the agreement provided for ordinary termination if either party gave 12 months’ written notice, as well as for extraordinary termination without notice in particular circumstances. It was alleged that Hägele’s termination was not in accordance with the contract. It was also alleged that the termination was part of a deliberate strategy to obtain control of sales in the North American market. It was only this latter claim, if pursued, that could involve some or all of the same issues as are pleaded against the other defendants. There would therefore be some risk of inconsistent verdicts if that claim was pursued in the arbitration, as well as in the Ontario action. That risk would depend on how the plaintiff chose to proceed with the arbitration in Germany. The appellant could well decide to limit its claims in the arbitration to breach of contract and wrongful termination, and to pursue the issues arising out of the conduct of the principals of the company and Cleanfix only in the Ontario action. That being said, the result of the arbitration in Germany would not dictate the result against the individual defendants and Cleanfix in the Ontario action. That is, even if the arbitrator determined that Hägele rightfully terminated the agreement without notice, it was possible that a court here could find that the actions of the individual defendants and Cleanfix were wrongful under Ontario law.
The second factor was whether there would be an injustice to the individual defendants and Cleanfix if the Ontario action were continued. There could be some duplication of witnesses, depending on how the appellant proceeded in the arbitration, as well as the timing of the arbitration and the action. However, that was one possible consequence of including a wide-ranging arbitration clause in a contract between two parties where disputes may arise that also involve others. In the dissenting judge’s view, the defendants had not demonstrated that they would suffer an injustice if the Ontario action were to continue. Everything that occurred, as well as Cleanfix’s ongoing business, was in Ontario. Many likely witnesses were in Ontario, and therefore would not be inconvenienced in terms of travelling. In fact, the defendants conceded before the motion judge that, if a traditional forum non conveniens analysis were applied, Ontario would be the more convenient and appropriate forum to litigate this dispute.
As to the third factor, and whether the defendants had demonstrated that a stay would not cause the plaintiff an injustice, the plaintiff alleged that its business has been ruined. The defendants had proceeded to carry on that business in Canada to the exclusion of the plaintiff. There would already be significant expense for the plaintiff to proceed with arbitration with Hägele in Germany. The plaintiff’s claims against the other defendants were made in accordance with the law of Ontario. Whether such claims also existed under the law of Germany was not known. The fact that another law would apply to these claims if they were arbitrated in Germany was at first blush prejudicial to the plaintiff, who did not agree with those defendants to that choice of law, and was therefore entitled to sue in Ontario. Accordingly, in the view of the dissenting judge, there would be prejudice to the plaintiff if a stay was ordered of its claims against the individual defendants and Cleanfix.
Accordingly the dissenting judge held that the motion judge erred in law by referring claims to arbitration in Germany against the defendants with whom the plaintiff made no agreement at all and no agreement to arbitrate, depriving the plaintiff of its right to litigate those claims in Ontario under Ontario law. The dissenting judge would have allowed the appeal in part, and set aside the stay of the claims in the Ontario action against the non-parties to the ESA.
(*1) 2016 ONCA 771 (CanLII)
(*2)  1 S.C.R. 450
(*3) (2010) 100 O.R. (3d) 241
(*4) (2013) 115 O.R. (3d) 241
(*5) From time to time a defendant may dispute the plaintiff’s commencement of a law suit in a particular forum on the basis that it is not as convenient or appropriate for the matter as another jurisdiction. For example, a majority of witnesses may reside elsewhere, or a different law might govern the dispute that than of the forum selected by the plaintiff. The defendant might this invoke the doctrine of forum non conveniens in asking the court to exercise its discretion to ‘stay’ the action in favour of it being commenced in the other jurisdiction. The point raised in the case law here is that it will be a rare situation where in the face of a valid forum selection clause that a defendant will be able to convince a court to employ its jurisdiction to refer a case elsewhere simply because the other location is then considered to be more convenient for the litigation.
(*6) (2006) 273 D.L.R. (4th) 65
(*7) 2010 ONCA 722 (CanLII), affirmed  1 S.C.R. 359
(*8) 2016 SCC 30 (CanLII) at para. 54.
(*9) See: Gulf Canada Resources Ltd. v. Arochem International Ltd. (1992), 1992 CanLII 4033 (BC CA) and Ontario v. Imperial Tobacco Canada Ltd., 2011 ONCA 525 (CanLII)
(*10) 2015 ABCA 22 (CanLII)
5. Importers’ Right to make Revenue-neutral Tariff Treatment Revision & CBSA Abuse of Process
The Federal Court of Appeal recently heard appeals of three cases brought by the Attorney General in respect of decisions from the Canadian International Trade Tribunal (“CITT”) (*1).
The fact pattern in each matter was essentially the same. Goods were imported into Canada under a tariff classification that entitled them to enter the country duty-free under Most Favoured Nation (MFN) tariff treatment (*2). The respective customs brokers each therefore declared the goods upon their entry as being subject to 0% rated MFN tariff treatment. This was notwithstanding that the goods could have alternatively been entered into Canada on a 0% basis pursuant to United States Tariff (“UST”) treatment pursuant to the North American Free Trade Agreement (NAFTA) (*3).
Although in each case, the goods were of United States origin, either for reasons of convenience or by virtue of the absence at the time of entry of a Certificate of Origin as required to claim NAFTA tariff treatment, the MFN treatment was used and was in any event equivocal given the 0% rate applicable to the goods as classified.
Subsequently, in each case, the Canadian Border Services Agency (“CBSA”) performed audits, which established that the goods had in fact been improperly classified (*4). The reclassification of the goods did not entitle them to enter into Canada on a duty free basis under MFN tariff treatment, although they would indisputably have been eligible for 0% rating if they had been entered under UST treatment, as they were entitled to be, at the time of entry into Canada. The CBSA denied the importers the right to amend the tariff treatment on a revenue-neutral basis such that the net effect of the reclassification and revised tariff treatment was to uphold the duty free entry. Rather, CBSA assessed the MFN duties applicable to the goods.
This was far from a new situation or indeed dispute for the CBSA. In fact, the exact same legal question had arisen in 2012 with respect to a case involving Frito-Lay Canada Inc. (“Frito-Lay”), which was decided in January 2013 (*5). In Frito-Lay, CITT denied the argument by CBSA that in order for a tariff treatment to be revised for a more favourable treatment, the one-year limitation period prescribed by s. 75 of the Customs Act (“the Act”) had to be respected (*6).
S. 74 of the Act refers to the time during which a refund can be claimed by an importer with respect to duties paid. CITT held that this provision was inapplicable since no moneys were being returned to the importer in the case of a revenue neutral tariff treatment amendment arising out of a tariff classification revision.
Although CBSA commenced appeal proceedings before the Federal Court of Appeal with respect to CITT’s decision in Frito-Lay, the Agency ultimately discontinued its appeal. However, rather than abiding by the principles espoused by CITT in its decision, CBSA proceeded to handle further cases in exactly the manner that had been reversed in Frito-Lay.
This course of action led to three importers filing appeals to the CITT against decisions reached by CBSA, the three cases commonly being referred to as the “Bri-Chem trilogy” (*7). The trio of cases was heard together by CITT in May 2015 with the appealing importers being represented by the same counsel as had successfully acted against CBSA in Frito-Lay. CITT rendered a decision in September 2015 which resolutely chastised the CBSA for its dogged refusal to follow the decision in Frito-Lay, holding that “CBSA knowingly frustrated importers from the applicability of Frito-Lay…….(and) created or applied a deliberate policy designed to ignore Frito-Lay. CITT further held that the CBSA was guilty of an abuse of process that was deliberate and elaborate and which had no bona fides basis.
In this case, the CBSA followed through with its appeal to the Federal Court of Appeal (*8). However, this forum was no more amenable to the arguments of the CBSA than had been the CITT in Frito-Lay or Bri-Chem at first instance.
The Federal Court of Appeal likewise heard the three cases on the same point of law concurrently and confirmed that the CITT’s decisions would be subject to judicial review pursuant to a reasonableness standard, owing to the “particular familiarity of CITT with the Customs Act” (*9). Stratas J.A. for the Federal Court of Appeal however went further in holding that the decision of CITT was not only reasonable but was in fact correct.
Although the Attorney General reiterated its position that it is not incorrect for an entry to be declared under an MFN tariff treatment, and therefore an importer could not rely upon the correction provisions found at s. 32.2 of the Act, the court was dismissive of the argument that the importer should be forced to resort to the refund provisions of s. 74 of the Act, and thereby be limited by the one-year limitation provision. The court also dismissed arguments premised on United States case law that interpreted domestic legislation from that jurisdiction.
The court went on to uphold the finding that the CBSA’s conduct in effectively refusing to apply the Frito-Lay decision as an abuse of process. Particular weight was given to the fact that the CBSA had consciously discontinued its appeal of the Frito-Lay decision, and preferred instead to embark on a policy of applying its CITT-impugned policy to other importers. This, according to the court, placed a “higher tactical burden upon the CBSA….to demonstrate its good faith and to offer good reasons to the Tribunal both as to why Frito-Lay should not be followed and why the appeal from Frito-Lay was discontinued.”
Stratas J.A. made a broadly applicable statement of the “hierarchical relationship” between tribunals and administrators. The court set out two alternative case scenarios where an administrator may make a bona fide decision to elect not to apply a prior tribunal decision to new scenarios. Either the administrator must be able to (1) point to material factual discrepancies between the two or cases; or (2) where a significant flaw is found in the tribunal’s reasoning which can be brought to the attention of the tribunal upon a further hearing.
In this case, neither of these alternative thresholds was satisfied. The CBSA had simply sought to re-litigate the same issues and relied upon the same lines of argument in Bri-Chem as had already been dismissed in Frito-Lay. The court however did deny the responding parties from claiming their costs on a solicitor-client basis given that the court could only assess the conduct of the litigant as before the court and not as before the Tribunal.
(*1) Canada (Attorney General) v. Bri-Chem Supply Ltd. 2016 FCA 257
(*2) MFN treatment is the cornerstone principle of the World Trade Organization and the first article of the General Agreement on Tariffs & Trade (GATT); it is the rule whereby countries do not discriminate amongst their trading partners.
(*3) The free trade agreement between Canada, Mexico and the United States is in force pursuant to the North American Free Trade Agreement Implementation Act (S.C. 1993, c. 44).
(*4) That is to say that the Harmonized System (HS) Code assigned to the goods upon their entry into Canada was eventually determined by CBSA to be incorrect pursuant to the application of the Customs Tariff, SC 1997, c 36
(*5) Frito-Lay v. President of the Canadian Border Services Agency, Appeal No. AP-2010-002
(*6) Customs Act, RSC 1985, c 1
(*7) Bri-Chem v. President of the Canadian Border Services Agency, Appeal No. AP-2010-017; Ever Green Ecological Services Inc. v. President of the Canadian Border Services Agency, Appeal No. AP-2014-027; Southern Pacific Resource Corp. v. President of the Canadian Border Services Agency, Appeal No. AP-2014-028
(*8) The Federal Court of Appeal is the first court to which decisions of the CITT are referred on a judicial review application pursuant to s.68 of the Customs Act.
(*9) This is in application of the approach endorsed by the Supreme Court in Dunsmuir v. New Brunswick 2008 SCC 9 and applied recently in Canada (Attorney General) v. Igloo Vikski Inc. 2016 SCC 38
6. Lack of Judicial Clarity Concerning the Liability of Boat Owners for Poorly Equipped Vessels
In Holman v. Oberg et al. (“Holman”)(*1), a Master of the Alberta Court of Queen’s Bench recently had an opportunity to address the exposure of pleasure craft owners for liability to third parties who suffer injuries due to the insufficient equipping of their boats.
Catherine and Lester Holman owned a pontoon boat, constructed by Lester. It had lights, but they were not working. It is not known whether the lights would have been compliant with the regulations to the Canada Shipping Act, 2001 (*2) even if they had been working. Nonetheless, they had been fixed earlier in the season. The Holmans said that they were unaware that the lights were out again.
At an evening cottage party, the Holmans’ adult son, Michael, had gone for a swim with another person. Afterwards, they retired to the couple’s boat. While Michael was sitting in the captain’s chair with a cigarette, they were hit by another boater, Vernon Oberg, who had not seen them. Michael suffered injuries. He subsequently sued Mr. Oberg and others, including Wizard Lake Marine, which owned Oberg’s boat.
Mr. Oberg and Wizard Lake Marine added Catherine and Lester Holman as Third Party Defendants, claiming that they were contributorily liable for the accident, including because the boat lacked working lights. Master Schlosser was tasked with addressing a motion to dismiss that claim summarily.
Before 2001, by virtue of the former Canada Shipping Act (*3), a defendant owner was required to show an absence of “actual fault or privity”. Courts required that the boat be seaworthy, properly equipped (with lights and navigational aids, etc.), and appropriately crewed. In effect, it was not enough for the owner to merely show an absence of a direct connection between himself and the wrong. He had to show an absence of actual fault.
The Court in Holman implied that it followed the reasoning of the BC Court of Appeal in Vukorep v. Bartulin (“Vukorep”)(*4). In the Vukorep case, a boater had failed to see large waves created by a BC Ferry boat in the distance, as he had become distracted by a waterskier to his port side. One of his passengers slipped and fell as a result of the defendant's failure to adjust course accordingly. The Court of Appeal rejected the trial judge's finding that the operator was negligent for failing to have installed an after-market handrail, which was not proven to have been standard in the boating community. In effect, there was no direct, actual fault. However, the Court was explicitly applying the old law under the now-defunct Canada Shipping Act, since the accident had taken place in 1998.
In the circumstances of the Holmans' case (after the statutory repeal), the Court was similarly prepared to find that the Holmans had discharged the “heavy burden” of proving an absence of any actual fault or privity. Michael’s decision to take the boat out in its unlit condition was sufficient to break the chain of responsibility and to absolve them. This was so even despite the Master being skeptical of the Holmans' assertion that they were unaware that Michael had gone aboard at the time of the accident.
By finding a lack of "actual fault", the Court effectively also neutered any argument for liability under a standard negligence analysis, where it would address whether there was a relationship of proximity and a duty of care; and, if there was a duty, whether it was met to a satisfactory standard. Since there was no actual fault, the rest of the analysis was moot. It implied no "causation" (i.e. no causal connection, without a breakage).
However, rather than an ordinary negligence analysis, the court considered the concept of "vicarious liability" at common law (i.e. the liability of innocent parties for the wrongs of others). Of course, that concept has existed in certain areas of the law, but not in the world of boat owner liability to third parties. Thus, the Master concluded that it would be better for "vicarious liability" to be imposed by statute rather than by incremental judge-made law (*5).
In coming to its conclusion, the Court summarized that Canadian maritime law now actually lays somewhere in-between direct responsibility and vicarious liability:
Maritime law now lies somewhere in-between direct and vicarious liability. While the law does not impose vicarious responsibility per se, it does require an absence of actual fault or privity on the part of the owner. To impose it [liability] in this context also seems contrary to the idea that the ‘captain is the master of the vessel’ and also, more recently, the requirement of all pleasure boat operators to pass a test and be licensed; both of which suggest an emphasis on the individual responsibility of the operator, rather than that of the owner (*6).
The result is unsatisfying. If a direct causal connection can be refuted, so much the better for a defendant: he will be absolved. However, where there is fault (or "causation"), it is entirely unclear what standard will apply. For example, if the Holmans had been aware that the lighting could go out on their pontoon boat, would they have been liable in the circumstances?
Thus, it is suggested that a better conceptualization of the law is set out in the 2014 decision of Atkinson et al. v. The Gypsea Rose et al. (*7). In that case, the Honourable Madam Justice Watchuk of the BC Supreme Court considered boaters' negligence in the context of a collision between two small pleasure craft on Lake Okanagan. Instead of finding that the law was somewhere "in-between direct and vicarious liability", Her Ladyship simply took the Court of Appeal's decision in Vukorep as an effective codification of the old statutory standard of care. In other words, the standard of care of a boat owner in negligence required that his vessel be seaworthy, properly equipped, and properly crewed. (*8)
Whether the "vicarious liability" concept of the Alberta Court will gain any traction is still unclear. However, it is apparent that the jurisprudence is likely to keep in line with Vukorep to the extent that an owner will have serious exposure to liability when his boat is poorly equipped, even if he is not aboard at the time of an operator's mistake.
Alan S. Cofman
(*1) 2016 ABQB 448
(*2) S.C. 2001, c. 26
(*3) R.S.C. 1985, c. S-9
(*4) 2005 BCCA 142
(*5) See para. 24
(*6) para. 25
(*7) 2014 BCSC 1017
(*8) The Atkinson decision also discusses a requirement for the owner to have given consent to the operator in order to be found at fault, at para. 98 et seq, which is beyond the scope of this article.
7. Federal Court Finds that Hague-Visby Rules Do Not Apply to Charter-Party Agreements
In the recent decision of AGF Steel Inc. v. Miller Shipping the Federal Court determined that the Hague-Visby Rules do not apply to charter-party agreements (*1).
The Plaintiff AGF Steel Inc. (“AGF”) and the Defendant Miller Shipping (“Miller Shipping”) entered into a written agreement entitled the “Time Charter Party”, which provided for the movement of 43,000 metric tons of steel rebar by water from Sorel, Quebec to Long Pond, Newfoundland over 6 voyages by the tug “Western Tugger” and the barge “Arctic Lift 1” (“the Contract”).
During the third voyage, the Arctic Lift 1 capsized on the south coast of Newfoundland, causing the total loss of over 7,000 metric tons of steel, valued at over $8,000,000.
The relevant clauses of the Contract were as follows:
Clause 18.2 of the Contract stipulated that both AGF and Miller Shipping, with respect to its own property, be liable for all loss and/or damages that it may suffer in connection with the Contract without regard to cause or negligence of either party to the Contract. This is known as a “knock for knock” risk allocation term.
Clause 19.5 provided that AGF would obtain Marine Cargo insurance covering “all risks” of physical loss or damage.
The Action and Summary Judgment Application
As a result of the loss of its Cargo, AGF brought an action in Federal Court against Miller Shipping for damages in excess of $8,000,000.
In response, Miller Shipper brought a summary judgment application stating there was no genuine issue for trial. Miller Shipping’s central argument was that Clause 18.2 of the Contract excluded their liability in contract or tort.
AGF responded that the Contract was a contract of carriage by water, which is captured by subsection 43(2) of the Act, and thus subject to the Hague-Visby Rules. Subsection 43(2) of the Act incorporates the Hague-Visby Rules for all contracts “for the carriage of goods by water from one place in Canada to another place in Canada…unless there is no bill of lading and the contract stipulates that those Rules do not apply”. This is critical because where the Hague-Visby Rules apply, parties are prevented from agreeing to terms that exclude or limit liability to an amount less than provided for in the Hague-Visby Rules, as contemplated by the Section 18.2 ‘knock for knock’ clause of the Contract.
As such, in order to be successful on the summary judgment motion, Miller Shipping had to establish that the Contract was a “charter-party agreement”. If the Contract was found to be a charter-party agreement, it would not be caught be subsection 43(2) and would not be subject to the Hague-Visby Rules, meaning the parties could be free to negotiate their own terms with respect to liability for any losses that may occur in the performance of the contract. Miller Shipping relied on the form of the agreement (its title and description of the parties), as well as the fact that the Contract called for the hire of a ship.
With respect to whether the Clause 18.2 ‘knock for knock’ clause should be enforced in the event that the Court found the Contract to be a charter-party agreement, Miller Shipping argued that themselves and AGF were sophisticated commercial entities who should be held to their bargains. Alternatively, Miller Shipping asserted that Clause 19.5 excluded their liability as it was an undertaking by AGF to insure the Cargo, which should have the effect of relieving the beneficiary of the undertaking from liability for loss or damage of the property.
With respect to Clause 19.5, AGF submitted that because Clause 19.1 required that Miller Shipping take out its own insurance sufficient to cover its own liability, and as its liability for lost cargo was covered by this insurance, there was no reason why the cargo insurance taken out by it should be deemed to cover the same liability. Moreover, AGF submitted that Clause 19.5 only meant that AGF would pay the premiums on the insurance and does not show an intention of AGF to waive its rights of action or subrogation.
The Court’s Decision on whether the Contract was a Charter-Party
The Court found that the Contract between AFG and Miller Shipping was a charter-party agreement.
The Court relied on the Federal Court of Appeal decision of T. Co. Metals L.L.C. v. Federal EMS (Vessel), in which the Court had outlined the three situations when a contract for the transportation of goods by water is properly characterized as a charter party (*3). One of these three situations, known as a voyage charter-party, is found where a specific ship or type of ships is hired for one or more voyages. The other two situations; a “bareboat or demise charter” provides for the hire of an unmanned ship, and a “time charter-party”, which is a contract for the hire of a fully manned ship for a specific duration.
The Court found that the Contract in this instance contemplated the hire of a tug and barge to transport Cargo, and was properly characterized as a voyage charter-party.
The Court appeared to be influenced by the “form” of the Contract, meaning the actual wording used on the Contract. The Court made reference to the fact that the second page of the Contract was titled “Time Charter Party” and the fact that AGF was defined as the “Charterer”.
Given that the Contract was a charter-party, the Hague-Visby Rules did not apply and the Court found that the parties were at liberty to negotiate the terms about their respective liability under the Contract.
The Court’s Decision on Whether the Contract Excluded Miller Shipping’s Potential Liability by Virtue of the 18.2 Exclusionary Clause or the 19.5 Insurance Clause
The Court was unwilling to decide whether Miller Shipping was able to rely on Clause 18.2 to exclude its liability. The Court ruled that there was insufficient evidence on the motion to confidently determine their respective rights and liabilities of the parties. The Court stated that questions of contractual interpretation are questions of mixed fact and law, and where the questions of law cannot be clearly isolated, those questions should not be decided summarily.
The Court’s decision re-affirms that when a shipper and ship-owner enter into a charter-party agreement, as opposed to a traditional contract for the carriage of goods by sea evidenced by a Bill of Lading, it will not be captured by Section 43(2) of the Act and the Hague-Visby Rules will not apply.
This gives commercial parties, both shippers and ship-owners/carriers, the ability to structure their affairs so as to avoid the application of the Hague-Visby Rules and assign the risk of loss or damage pursuant to their own agreements. Of course, this gives commercial parties much more autonomy. On the other hand, parties entering into a charter-party agreement need to be aware that they will not be subject to any protections that they may have otherwise had under the Hague-Visby Rules. A carrier, for example, would not be able to rely on the limitation of liability provisions under the Hague-Visby Rules and may be exposed to the full value of lost or damaged cargo under a charter-party agreement.
The Court also provided some guidance on the difference between a charter-party agreement and a contract for the carriage of goods. The Court noted that in this case, both the “pith and substance” of the agreement was that of a charter-party agreement. With respect to the “pith” of the agreement, the Court was influenced by the language of the agreement, as discussed above, such as the fact that the agreement was titled “Time Charter Party” and the fact that AGF was defined as the “Charterer”. With respect to the “substance” of the agreement, the Court found that the agreement contemplated the hire of a tug and barge, as opposed to merely the transportation of goods from one point to another.
Commercial parties entering into transportation agreements should take this into account when attempting to frame their agreement as either a charter-party agreement or as a contract for the carriage of goods, as the case may be.
Finally, from a procedural perspective, the decision provides guidance as to when summary judgment in the Federal Court is attainable. The Court commented that although the widely circulated Supreme Court of Canada decision of Hryniak v. Mauldin (*4) (wherein the Supreme Court of Canada commented upon the availability of summary judgment under the Ontario Rules of Civil Procedure, R.R.O. 1990, Reg. 194) serves as a reminder to the Federal Court of certain principles resident in the Federal Court Rules, it does not materially change the procedures or standards to be applied in summary judgment motions brought in the Federal Court under Rule 215(1).
(*1) AGF Steel Inc. v. Miller Shipping, 2016 FC 461
(*2) Marine Liability Act, S.C. 2001, c. 6
(*3) T. Co. Metals L.L.C. v. Federal EMS (Vessel), 2014 1 F.C.R. 836
(*4) Hryniak v. Mauldin, 2014 1 S.C.R. 87
8. Verreault Navigation Inc. v. 662901 N.B. Ltd.: Federal Court performs (another) ranking exercise in connection with creditors’ claims to proceeds of vessel sale
Justice Harrington of the Federal Court was recently tasked with resolving a priority dispute amongst various creditors in the context of a ship arrest and sale. In this case, Verreault Navigation Inc. v. 662901 N.B. Ltd., 2016 FC 1281, the owner of a tug, the Chaulk Determination, and a barge, the Chaulk Lifter, fell into financial difficulty. The tug sank and was abandoned, at which point creditors arrested and sold the barge. Chief among the creditors was the plaintiff, Verreault Navigation Inc. (“Verreault”) on account of various work it had performed on the Chaulk Lifter. The sale generated a fund of only $600,000.00 with which to satisfy the claims of the various creditors, which totaled several million dollars.
This decision, along with another recent decision (also by Justice Harrington, Ballantrae Holdings Inc. v. The “Phoenix Sun”, 2016 FC 570 (F.C.) (*1)), provides a further example of how Canadian courts will deal with priority disputes amongst various creditors in maritime actions. Creditors in similar circumstances should expect results similar to the outcomes in these cases.
The Chaulk Determination and Chaulk Lifter were both owned by 662901 N.B. Ltd. (the “Company”), which had been incorporated in March 2012. The sole officer and director of the Company was David Chaulk.
The Chaulk Determination and the Chaulk Lifter arrived at the Port of Trois-Rivieres, Quebec, on November 27, 2013.
On March 30, 2014, the Company issued a promissory note to David Chaulk’s brother, Brent, in the amount of $305,000.00. The note stated, “security is in the form of a marine mortgage on the vessel Chaulk Lifter”.
On June 15, 2014, the Company issued another promissory note to David Chaulk’s father, Morris, this time in the amount of $42,000.00. It also stated that security was in the form of a mortgage on the Chaulk Lifter.
Harbour dues were never paid on either vessel, and consequently the Port of Trois-Rivieres issued a detention order against both vessels on June 26, 2014.
A single mortgage in favour of Brent and Morris Chaulk in the amount of $347,000.00 was then registered on July 18, 2014.
Then, on August 20, 2014, the Company worked out an arrangement with the Port of Trois-Rivieres, in which some of the harbour dues owing were paid. The Company granted the Port another mortgage for $57,305.27. In exchange, the detention order was lifted. Brent and Morris Chaulk gave priority to the Port’s mortgage.
The Chaulk Lifter then arrived at Verreault’s yard at Les Méchins on October 7, 2014, in order to have some work carried out.
Unfortunately, soon after, the Company defaulted on the Port’s mortgage. As a result, the Port arrested the Chaulk Lifter on December 12, 2014, while she was in drydock. The Chaulk Lifter remained in Verreault’s possession while the Chaulk Lifter was under arrest.
The Chaulk Determination then sank on December 26, 2014.
Verreault then commenced its action against the Chaulk Lifter, during which the barge was ordered sold on June 23, 2015. The sale was completed on August 4, 2015, for $600,000.00.
The Undisputed Claims
Of the total pool of $600,000.00, the Court first dealt with certain undisputed claims, as follows.
The Acting Marshal’s Fees to Bring the Ship to Sale
First on the list was the claim by the acting marshal for his fees and expenses in dealing with the sale of the Chaulk Lifter. This claim was in the amount of $42,395.19 and had previously been allowed in full by the Court.
Fees to Bring the Ship to Sale
Next, the Court considered claims by both the Port and Verreault for additional expenses incurred in arresting the vessel, commencing the action and converting her into a fund against which all of the creditors could claim.
In this case the Court found that such costs should be divided in two, since the Port had initially arrested the barge but Verreault had brought her to sale. The Port’s costs had already been paid; Verreault’s costs, in the amount of $3,306.23, were awarded.
Two Preferred Claims
The Court then awarded two additional claims that were granted priority under various provisions of the Canada Marine Act.
First, Transport Canada was paid $37,155.70 for outstanding harbour dues, and for the cost of repairing damage to its dock at Les Méchins, which had been struck by the Chaulk Lifter.
Second, the Port of Trois-Rivieres was paid $57,305.27 for harbour dues unrelated to the mortgage, and its costs.
The Remaining Claims
Accordingly, after the above claims had been paid out, $463,143.84 plus a small amount of interest remained with which to satisfy all remaining creditors.
Verreault obtained judgment against the Chaulk Lifter and the Company in the amount of $217,551.67, with pre- and post-judgment interest and costs. The judgment covered the cost of the various services and work that Verreault had performed on the barge. In addition, Verreault claimed for several additional amounts including wharfage, various movements of the barge, fuel supply and inspections. Verreault’s total claim was in the amount of $373,726.98.
Justice Harrington had no difficulty finding that Verreault enjoyed a possessory lien over the barge, which outranked the mortgages. He allowed Verreault’s claim virtually in its entirety, subject to a few deductions. In total, the Court found that Verreault was entitled to $324,839.01 of the remaining funds.
The Port of Trois-Rivieres
In total, the Port claimed $316,468.83 against the Company and the barge. $56,305.83 was the amount of the mortgage that it held on the Chaulk Lifter. The balance of $210,181.00 was for sums owing in respect of the Chaulk Determination, for wharfage, clean-up and removal (having been abandoned by her owners after she sank).
The Court decided that in this case, the Port’s mortgage claim would rank above that of the other Chaulk family members. Thus, The Port was entitled to a priority payment of $56,305.83, on account of its mortgage.
However, the Court observed that in Canada, it is well established that a claim in respect of a ship only carries with it an ordinary right in rem, without priority, against a sister ship. Thus, the Port’s claim against the Chaulk Determination in the amount of $210,181.00 could only rank alongside the other ordinary creditors when directed against the proceeds of sale of the Chaulk Lifter.
Brent and Morris Chaulk
Next came the claims of the Chaulk family members who purported to hold mortgages. The Court found that it was clear from the evidence that David Chaulk had intended to give preference to his brother, Brent, and to his father, Morris.
Ultimately, the Court found that the mortgages were not granted “at arm’s length” as between the family members. As Justice Harrington remarked, “No doubt the Chaulks lent a helping hand out of love for David. However, that love should not come at the expense of arm’s length creditors.” His Honour held that the Chaulks would rank behind the other ordinary creditors, and would recover only if there was anything left over from paying them all out.
The Canadian Coast Guard
The Coast Guard submitted a claim in the amount of $1,839,927.68 for costs associated with the sinking of the Chaulk Determination. The Court held that the Coast Guard would have enjoyed a high priority if the vessel arrested and sold had been the Chaulk Determination; however, given that the proceeds of sale were from the Chaulk Lifter, the Coast Guard was only an ordinary creditor and not entitled to priority.
The Administrator of the Ship-source Oil Pollution Fund
This claim was different than the others. In fact, it was really a claim for security in the event that the Ship-source Oil Pollution Fund was obligated to compensate parties who may have suffered damages as a result of the pollution caused by the sinking of the Chaulk Determination.
As the Court observed, persons who have suffered actual or anticipated oil pollution damage may, in accordance with s. 103 of the Marine Liability Act (the “Act”), file a claim with the Administrator if that claim is in connection with the international Bunker Convention, being Schedule VIII to the Act. The Bunker Convention has force and effect in Canada by virtue of s. 70 of the Act.
Section 102 of the Act gives the Administrator the right to commence an action in rem “against the ship that is the subject of the claim, or against any proceeds of sale of the ship that have been paid into court…”
In this case, however, the Administrator filed a claim against a sister ship, and not the ship that had caused the pollution. This gave rise to an issue as to whether the Administrator could do so. The Court found that it could. While s. 102 of the Act did not expressly give the Administrator the right to claim against a sister ship, Justice Harrington was nonetheless satisfied that the Administrator had the right to claim against the sister ship by virtue of section 43(8) of the Federal Courts Act, which allows for an action to be brought in rem against “any ship that, at the time the action is brought, is owned by the beneficial owner of the ship that is the subject of the action”. As nothing in the Marine Liability Act detracted from that provision, the Court allowed the Administrator’s claim to stand and rank as an ordinary creditor.
Ultimately, the Administrator’s share of the remaining proceeds of sale amounted to $44,922.65. Being security for future costs, however, this amount was strictly speaking only to be applied as and when the Administrator approved claims from others in connection with the pollution caused by the Chaulk Determination. The question therefore arose as to whether the Administrator should be paid the funds up front, or whether they should be paid into court to await future claims. The Court found that the most practical solution in this case was to pay the Administrator directly. The Administrator could seek directions from the Court should difficulties arise in the future.
In the result, the Court established the following order of priority in this case:
1. The Acting Marshal for costs related to the sale of the ship
2. Verreault and the Port of Trois-Rivieres for costs related to the sale of the ship
3. Transport Canada for outstanding harbour dues and repairs to its dock
4. The Port of Trois-Rivieres for harbour dues unrelated to its mortgage
5. Verreault for the bulk of its main claim, by virtue of its possessory lien over the barge
4. The Port of Trois-Rivieres, for that portion of its claim covered by a mortgage
5. The Canadian Coast Guard, for its unsecured portion of the remainder
6. The Administrator of the Ship-source Oil Pollution Fund, for its unsecured portion of the remainder
7. The Port of Trois-Rivieres, for its unsecured portion of the remainder
(*1) For a discussion of the Court’s treatment of the various competing priorities in the “Phoenix Sun” case, see the article by the author entitled “Ballantrae Holdings Inc. v. The “Phoenix Sun”: Federal Court Performs Ranking Exercise In Connection With Creditors’ Claims to Proceeds of Vessel Sale”, which can be found starting at page 21 of the October 2016 edition of the Fernandes Hearn LLP Newsletter.
9. Loss Transfer Arbitrations: Burden and Onus of Proof Clarified
The Personal Insurance Company v. Zurich Insurance Company Ltd. (Arbitrator Bialkowski, October 28, 2016, unreported)
Loss Transfer Review : Ontario (*1)
Section 275 of the Insurance Act, R.S.O. 1990, c.I.8 (“Insurance Act”), creates a scheme for loss transfer indemnity where any insurer who paid statutory accident benefits may be repaid by another insurer in collisions involving heavy commercial vehicles and motorcycles.
Section 9(2) of Ontario Regulation 664 under the Insurance Act provides a first party insurer who insures an automobile with the right, in certain circumstances, to claim indemnification from a second party insurer who insures a heavy commercial vehicle to the extent of fault found on the operator of the heavy commercial vehicle.
The purpose of the loss transfer regime is to balance the costs and spread the risk between the insurers of different sizes of vehicles. It is effectively a loss re-allocation, since the risks assumed by insurers of smaller vehicles (e.g. motorcycles, snowmobiles, small cars) may be disproportionately large compared to the risks of insuring a heavy commercial vehicle; specifically, with respect to the potential for injury.
The loss transfer rules govern indemnity for the payment of accident benefits, i.e. no-fault medical and other payments made to injured victims of motor vehicle collisions including treatment expenses (physiotherapy, rehabilitation, prescription medications etc.), attendant care, income replacement, and housekeeping expenses. Typically, each insurer will bear the cost of the no-fault accident benefits paid to its own insured, but, when a heavy commercial vehicle is involved in an accident with a smaller vehicle, the first party insurer will make claim for the reimbursement of paid accident benefits under the loss transfer rules from the second party insurer.
There must, however, be at least partial liability on the part of the heavy commercial vehicle driver before its insurer must reimburse the first party insurer. If the truck’s driver is not liable, then no reimbursement is required. Reimbursement is made in accordance with the relative degrees of liability of the drivers (see “Fault Determination Rules”, below).
If the insurers are unable to agree with respect to indemnification under s.275 of the Insurance Act the dispute shall be resolved through arbitration under the Arbitration Act, 1991, S.O. 1991, C.17.
Application of the Loss Transfer Rules
To apply, an at fault vehicle must be considered a “heavy commercial vehicle”, which is defined as a “commercial vehicle” used to transport materials, goods, tool and/or equipment and having a gross weight greater than 4500 kilograms (*2).
The Fault Determination Rules
In Ontario, the apportionment of fault between two vehicles under the loss transfer rules is based upon the “Fault Determination Rules”. These rules describe typical accident scenarios, assigning pre-determined percentages of fault. If none of scenarios in the Fault Determination Rules applies to a particular accident then fault will be determined in accordance with the ordinary rules of law.
As indicated in Jevco Insurance Company v. York Fire & Casualty Company (1996) 27 O.R. (3d) 483,
“the purpose of the legislation is to spread the load among insurers in a gross and somewhat arbitrary fashion, favouring expedition and economy over finite exactitude.”
Challenges to the Quantum Paid by the First Party Insurer
The second party insurer has the right to dispute the amount of benefits paid by the first party insurer to its insured. According to the Regulation (*3) however, the onus of proof is on the second party insurer to prove that such payments were unreasonable, a very high standard of proof. The test is not whether the second party insurer would have made the same payments to the insured, but whether the payments made were “reasonable” under all the circumstances. Only in very rare circumstances could a second party insurer successfully challenge the amount of accident benefits paid. The quantum of benefits is not realistically subject to any serious challenge, as practically speaking each insurer is motivated by its own business interests not to overpay its insured.
It is in this area that a recent case, The Personal Insurance Company v. Zurich Insurance Company Ltd. (“The Personal v Zurich”), a decision of Arbitrator Bialkowski (October 28, 2016 unreported) dealt with the issues of onus and burden of proof in loss transfer cases.
The Personal v Zurich: Facts
A loss transfer arbitration was commenced by the first party insurer after the second party insurer declined to pay the demanded loss transfer indemnity.
On August 6, 2009, a 1994 Honda Civic (insured by The Personal, the first party insurer) was allegedly involved in an accident with a heavy commercial vehicle (insured by Zurich, the second party insurer). The three passengers and the driver of the Honda Civic (the “automobile”) provided written statements to the police to the effect that they were struck from behind by the heavy commercial vehicle (the “truck”). The truck struck them a number of times then left the scene. The operator of the automobile chased the truck, caught up with it and flagged the truck over. The police were called and the truck driver was charged with careless driving. (*4)
The evidence presented at arbitration included that the investigating officer spoke with the parties but observed no property damage to the truck but did note damage to the rear bumper and trunk area of automobile and the police report noted that both vehicles were operated at 50 km/h. The truck driver had indicated that he did not see the other vehicle and was unaware of that there had been any collision. There was a signed statement from the driver of the truck, which included:
“The officer ask (sic) what happened. I said don’t know for sure as did not see her in front of my truck. It must have been just before I turned on to Matheson.”
The insurer of the automobile, The Personal, processed the property damage claim and the assigned appraiser concluded that the automobile could not be repaired on an economically viable basis. The Personal also received Applications for Accident Benefits from the insured driver and occupants of the automobile.
Statements were taken from The Personal’s named insured driver and her passengers which were generally consistent in their description of the route of the automobile and that they had been struck from behind by a large truck several times.
The Personal considered whether the claims resulted from an “accident” and, as part of that investigation, an expert engineer was jointly retained by the insurers. The engineer concluded that the accident did not occur as reported and that the circumstances and evidence were not consistent with a collision involving the frontal aspect of the truck. Despite the engineer’s conclusions and because the circumstances did not contain the hallmarks of a staged accident, The Personal did not deny the claims as presented. The Personal then sought indemnification under loss transfer for the various benefits it had paid to its insured and the occupants of the automobile.
Zurich, at the arbitration, maintained that The Personal should have accepted the conclusions of the engineer that there was no accident and then denied indemnification regarding property losses and accident benefits. The Personal had advised of its reasons for not denying the claims, including, amongst others, that the report was overly technical and difficult to understand, failed to take into account all accident details including the written statements of The Personal’s insured driver and passengers and the facts of the accident did not contain the usual hallmarks of a staged accident. (*5) The truck driver had also not denied that he had hit the automobile and it was possible that he did not see the automobile or feel any impact(s).
The Personal relied upon Rule 6(2) of Fault Determination Rules for a finding of 100% fault as against the Zurich insured truck driver. This Rule deals with straightforward rear-end collisions. Zurich argued that The Personal bore the onus of proving that it was entitled to loss transfer indemnity on the basis that (1) an accident had occurred, which gave rise to the responsibility to pay accident benefits; and (2) that there is some degree of fault attributable to the Zurich insured driver. The Personal, Zurich argued, was unable to prove that an “accident” occurred which could give rise to the responsibility to pay accident benefits, as there was no collision between the automobile and the truck, as alleged. Alternatively, Zurich claimed that The Personal was unable to establish the circumstances of the accident and so it was impossible to determine which Fault Determination Rule applied or that any fault was attributable to the truck driver. Accordingly, Zurich had refused to indemnify The Personal.
The parties also argued whether The Personal’s payments were unreasonable. The Personal maintained that its decision to pay accident benefits could not be viewed as “unreasonable” and that Zurich would essentially have to prove that the decision to pay was grossly negligent or in bad faith. Zurich, it was argued, could not meet this onus and The Personal’s decision to pay benefits, despite the engineering evidence of the engineer, should not be disputed.
Arbitrator Bialkowski reviewed the case law Commercial Union Assurance Co. of Canada v. Boreal Property & Casualty Co. (December 21, 1998, unreported) where Arbitrator Samworth concluded:
“that in terms of loss transfer principles that there is a limited right of the insurer responsible for the indemnification to question the appropriateness of the payments made by the primary insurer. There is no doubt that the indemnifying insurer is entitled to look at the ‘reasonableness of the payments’ but in my view that inquiry is limited to confirming that the primary insurer did not
1. act in bad faith
2. make payments that were not covered under the Statutory Accident Benefits Schedule in existence at the time of the loss, i.e. pay for a weekly benefits when there was no such entitlement or
3. in general, so negligently handle the claim that payments were made greatly in excess of that which the insured would have been entitled had the file been managed by a reasonable claims handler”.
Further, Jevco Insurance Co. v. Guardian Insurance of Canada (Arbitrator Malach - August 28, 2000) made the following comments with respect to a claim that payments were made unreasonably:
“…. it is not for second party insurers to second guess payments made by first party insurers. The latter are presumed to be acting reasonably. It may well be better practise for a first party insurer, contemplating a lump sum settlement with its insured, to seek input from the second party insurer, if the circumstances permit. That is only a common sense precaution against future problems. It does not, however, shift the onus of proving reasonableness. It is for the party from whom indemnification is sought to show the payment was unreasonably made”.
In Dominion of Canada General Insurance Co. v. Royal and SunAlliance Insurance Company of Canada (Arbitrator Malach – August 20, 2001), also stated:
“This system of loss transfer is a reimbursement system. It is based on the premise that the first party insurer has a relationship with the insured person and must treat that person fairly. The first party insurer must handle claims under the SABS reasonably and properly and must comply with the timelines set out in the SABS. The first party insurer owes a duty to the insured person to act in good faith. First party claims are different than third party claims. When considering a loss transfer claim, one must assume that the first party insurer has acted reasonably and properly throughout the process…. Largely because of the unique relationship between the first party insurer and an insured person in claims under the SABS, I conclude that there is a very high onus on the second party insurer to demonstrate that any settlement was not reasonable. The unique relationship between the first party insurer and the insured person is recognized in the various Bulletins clarifying the loss transfer mechanism. If the second party insurer is not to intervene, and is not to interfere, and may not dictate claims handling decisions, and should not second guess, then that second party insurer must prove that any settlement entered into is clearly and grossly unreasonable or that there was gross mismanagement or gross negligence in the handling of the claim”.
Arbitrator Bialkowski stated that this was not a case where Zurich was claiming the payments were unreasonable, but rather that the accident did not occur so that the claimants were never entitled to benefits in the first place and, ultimately, loss transfer was not available.
Despite the conclusions reached by the engineer, Arbitrator Bialkowski found that there was, on the balance of probabilities, some contact between the two vehicles and he gave weight to the claimants statements, who all maintained that there was contact between the vehicles. Such evidence was uncontradicted; in fact, the evidence of the truck driver did not deny that contact was made. Further, Arbitrator Bialkowski concluded that the engineer’s reports did not provide sufficient probative evidence to overcome the evidence of the claimants and that the engineer’s opinion might have been different if he had had all evidence before him.
Arbitrator Bialkowski specifically looked to the question as to why the four claimants would claim that there was contact between the vehicles if there was none and noted that all four claimants returned to work rather than claiming income replacement benefits. At page 12, the a Arbitrator Bialkowski stated, “What would be the purpose of the staged accident if the only benefit available would be some housekeeping or caregiver benefit with the medical rehabilitation payments merely going to service providers?”
Arbitrator Bialkowski also noted that he did not have all the critical evidence. He indicated that considerable weight might have been given to the evidence of the investigating police officer, who had had the opportunity of speaking with all five individuals involved as well as observing the property damage. It was clear from the police file, however, that to the investigating police officer, there was property damage that could be related to the incident. He concluded that the police officer must have found the claimants credible, because he charged the truck driver with careless driving. It is to be noted that Zurich did not submit evidence as to the outcome of those charges.
Arbitrator Bialkowski concluded that the evidence of the engineer could not displace the evidence of the truck driver and that, at page 13, “Although it is possible that there was no contact between the vehicles, the evidence is not so compelling so as to tip the balance of probability on that point.” He also concluded that to find otherwise would mean that the four claimants had conspired together to make fraudulent accident benefits claims, which he declined to consider on the evidence before him.
Arbitrator Bialkowski concluded that the onus of proof to demonstrate that there was contact between the vehicles was upon first party insurer, The Personal, which met the onus for the most part on the strength of the four claimants’ evidence. The engineering evidence was also not sufficiently persuasive to dismiss the evidence of the claimants. Accordingly, he found that there was “some contact between the two vehicles” and he was satisfied that The Personal’s decision to accept the accident benefits claims was reasonable in the circumstances.
As a straightforward rear-end collision, Rule 6(2) of the Fault Determination Rules was applied making Zurich fully responsible for indemnifying The Personal for the accident benefits reasonably paid to or on behalf of the claimants. He awarded prejudgment interest and costs against Zurich on a partial indemnity basis along with costs of the arbitration.
Loss transfer cases are rare and The Personal v Zurich is a helpful review of the law regarding the burden of proof upon the second party insurer when contesting accident benefit payments made by a first party insurer as well as clarifying that the first party insurer has the onus of proving the circumstances of the accident. Further, parties in such arbitrations should also ensure that all relevant evidence is before the arbitrator.
Kim E. Stoll
(*1) The Review section is in part reproduced from the author’s article in the October 2014 Fernandes Hearn LLP newsletter.
(*2) There is case law relating to the weight of the heavy commercial vehicle as actual weight of the vehicle at the time of the accident and not the full capacity weight is relevant. Also for further information regarding to whom Loss Transfer applies, please see the article referred to in (*1) above.
(*3) See the Insurance Act, R.S.O. 1990 as amended and Ontario Automobile Insurance Regulations RRO 1990 as amended, Reg 664
(*4) There was no evidence presented regarding the outcome of the charges.
(*5) Such as the fact that the accident occurred in the early morning while all four occupants in our insured’s vehicle were travelling to work. The police attended and a Motor Vehicle Accident Report was prepared (which is atypical in staged accident cases) and the truck driver was charged with careless driving. Also the claimants were not all off work collecting accident benefits.
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